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Does a Seller Really Want Another Bidder?

Jeremy I. Bulow and Paul D. Klemperer (AER, 1996) argue that the usual concerns of auction design miss the big picture, and show that a simple English auction without a reserve price and N + 1 bidders attains expected revenue in excess of any auction with N bidders. The issue of how this additional bidder might be attracted is not treated in their model. In fact, that an auction can convince another bidder it is worth his while to compete carries a critical message about expected revenue. In those many markets where potential bidders decide whether to compete in an auction based on the expected probability of bidding, Bulow and Klemperer's conclusion is shown here to be overturned. I explore the symmetric equilibrium of a model where potential bidders first decide whether to participate in an auction, and then participants select bidding strategies. Expected revenue is increased by some degree of bidder discouragement, in that it is never optimal to have all N potential bidders participate with probability one, even for very small N

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File URL: https://economics.missouri.edu/working-papers/2007/wp0711_harstad.pdf
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Paper provided by Department of Economics, University of Missouri in its series Working Papers with number 0711.

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Length: 12 pgs.
Date of creation: 15 May 2007
Date of revision:
Handle: RePEc:umc:wpaper:0711
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  1. Porter, Robert H, 1995. "The Role of Information in U.S. Offshore Oil and Gas Lease Auctions," Econometrica, Econometric Society, vol. 63(1), pages 1-27, January.
  2. Gaver, Kenneth M & Zimmerman, Jerold L, 1977. "An Analysis of Competitive Bidding on BART Contracts," The Journal of Business, University of Chicago Press, vol. 50(3), pages 279-95, July.
  3. John G. Riley & William Samuelson, 1979. "Optimal Auctions," UCLA Economics Working Papers 152, UCLA Department of Economics.
  4. Ashenfelter, O. & Genesove, D., 1992. "Testing for Price Anomalies in Real Estate Auctions," Working papers 92-2, Massachusetts Institute of Technology (MIT), Department of Economics.
  5. Eric Maskin & John Riley, 2000. "Equilibrium in Sealed High Bid Auctions," Review of Economic Studies, Oxford University Press, vol. 67(3), pages 439-454.
  6. Laffont, J.J., 1996. "Game Theory and Empirical Economics: The Case of Auction Data," Papers 95.394, Toulouse - GREMAQ.
  7. McAfee, R Preston, 1993. "Mechanism Design by Competing Sellers," Econometrica, Econometric Society, vol. 61(6), pages 1281-1312, November.
  8. Samuelson, William F., 1985. "Competitive bidding with entry costs," Economics Letters, Elsevier, vol. 17(1-2), pages 53-57.
  9. Professor Paul Klemperer, 2000. "What Really Matters in Auction Design," Microeconomics 0004008, EconWPA.
  10. Harstad, Ronald M. & Pekec, Aleksandar Sasa & Tsetlin, Ilia, 2008. "Information aggregation in auctions with an unknown number of bidders," Games and Economic Behavior, Elsevier, vol. 62(2), pages 476-508, March.
  11. Michael H. Rothkopf, 1969. "A Model of Rational Competitive Bidding," Management Science, INFORMS, vol. 15(7), pages 362-373, March.
  12. Levin, Dan & Smith, James L, 1994. "Equilibrium in Auctions with Entry," American Economic Review, American Economic Association, vol. 84(3), pages 585-99, June.
  13. Ronald M. Harstad & Michael H. Rothkopf, 2000. "An "Alternating Recognition" Model of English Auctions," Management Science, INFORMS, vol. 46(1), pages 1-12, January.
  14. Burguet, Roberto, 2007. "Right to choose in oral auctions," Economics Letters, Elsevier, vol. 95(2), pages 167-173, May.
  15. Dirk Bergemann & Martin Pesendorfer, 2001. "Information Structures in Optimal Auctions," Cowles Foundation Discussion Papers 1323, Cowles Foundation for Research in Economics, Yale University.
  16. Gale Ian L. & Hausch Donald B., 1994. "Bottom-Fishing and Declining Prices in Sequential Auctions," Games and Economic Behavior, Elsevier, vol. 7(3), pages 318-331, November.
  17. Bulow, Jeremy & Klemperer, Paul, 1996. "Auctions versus Negotiations," American Economic Review, American Economic Association, vol. 86(1), pages 180-94, March.
  18. Jacob K. Goeree & Charles R. Plott & John Wooders, 2004. "Bidders' Choice Auctions: Raising Revenues Through the Right to Choose," Journal of the European Economic Association, MIT Press, vol. 2(2-3), pages 504-515, 04/05.
  19. Jacques Crémer & Yossi Spiegel & Charles Zheng, 2009. "Auctions with costly information acquisition," Economic Theory, Springer, vol. 38(1), pages 41-72, January.
  20. Dirk Bergemann & Juuso Valimaki, 2002. "Information Acquisition and Efficient Mechanism Design," Econometrica, Econometric Society, vol. 70(3), pages 1007-1033, May.
  21. Robert Wilson, 1977. "A Bidding Model of Perfect Competition," Review of Economic Studies, Oxford University Press, vol. 44(3), pages 511-518.
  22. Eliaz, Kfir & Offerman, Theo & Schotter, Andrew, 2008. "Creating competition out of thin air: An experimental study of right-to-choose auctions," Games and Economic Behavior, Elsevier, vol. 62(2), pages 383-416, March.
  23. Roberto Burguet, 2005. "The condominium problem; auctions for substitutes," Review of Economic Design, Springer, vol. 9(2), pages 73-90, 04.
  24. repec:att:wimass:9215 is not listed on IDEAS
  25. French, Kenneth R & McCormick, Robert E, 1984. "Sealed Bids, Sunk Costs, and the Process of Competition," The Journal of Business, University of Chicago Press, vol. 57(4), pages 417-41, October.
  26. James Cox & Sam Dinkin & James Swarthout, 2001. "Endogenous Entry and Exit in Common Value Auctions," Experimental Economics, Springer, vol. 4(2), pages 163-181, October.
  27. Harstad, Ronald M, 1990. "Alternative Common-Value Auction Procedures: Revenue Comparisons with Free Entry," Journal of Political Economy, University of Chicago Press, vol. 98(2), pages 421-29, April.
  28. Paul Milgrom & Robert J. Weber, 1981. "A Theory of Auctions and Competitive Bidding," Discussion Papers 447R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  29. Ronald M Harstad, 2011. "Endogenous Competition Alters the Structure of Optimal Auctions," ISER Discussion Paper 0816, Institute of Social and Economic Research, Osaka University.
  30. Eric Maskin & John Riley, 2000. "Equilibrium in Sealed High Bid Auctions," Review of Economic Studies, Oxford University Press, vol. 67(3), pages 439-454.
  31. Milgrom, Paul R, 1981. "Rational Expectations, Information Acquisition, and Competitive Bidding," Econometrica, Econometric Society, vol. 49(4), pages 921-43, June.
  32. Harris, Milton & Raviv, Artur, 1981. "Allocation Mechanisms and the Design of Auctions," Econometrica, Econometric Society, vol. 49(6), pages 1477-99, November.
  33. Hausch, Donald B & Li, Lode, 1993. "A Common Value Auction Model with Endogenous Entry and Information Acquisition," Economic Theory, Springer, vol. 3(2), pages 315-34, April.
  34. Robert Wilson, 1977. "A Bidding Model of Perfect Competition," Review of Economic Studies, Oxford University Press, vol. 44(3), pages 511-518.
  35. Douglas K. Reece, 1978. "Competitive Bidding for Offshore Petroleum Leases," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 369-384, Autumn.
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